Economist and Portfolio Manager & Research Analyst at Trillium Asset Management, Cheryl Smith, breaks down what investors might be missing about interest rates and the treasury notes.
ADAM SHAPIRO: Let's keep talking about these markets. Joining us on the telephone right now is Cheryl Smith. She's an economist and portfolio manager and research analyst at Trillium Asset Management. Good to have you here. And we've made a big deal out of what's been going on with the yield on the 10-year. People like you have been following more closely longer term treasuries, the 30-year. What is it that investors need to know that they might be missing in this constant barrage of information about interest rates in the yields on those notes?
CHERYL SMITH: Hello, thank you for having me. I think what we are missing-- what the overall market is missing is that there's a big difference between a temporary price increase and a sustained process of inflation. So what investors are reacting to now is some statements by the Federal Reserve that they are prepared to run the economy a little bit hot for a period of time as a way of jumpstarting the economy back from all the scarring that we've had as a result of COVID.
And because the market, the bond market in particular, is still very sensitized to inflation 30 years after we last had substantial inflation, they are looking for every single possible place that they can find a price that's going up and looking at it and jumping up and down and saying, wow, there's inflation. It's going to happen. It's going to happen. We've been looking for it for 14 years. It hasn't shown up.
So I really think that the bond market is entirely too freaked out about this and really wants the Fed to go back to the old policy that at any moment that you saw the slightest hint of inflation to just shut down the labor markets. That's really the wrong policy for now.
SEANA SMITH: Well, Cheryl, then what is the right policy--
CHERYL SMITH: The Fed's policy is a good one.
SEANA SMITH: Yeah, I was going to say-- sorry, I think you cut out there. If you could just elaborate then on what you think is the appropriate policy for right now and then I guess where you're finding opportunity in the market.
CHERYL SMITH: Sure. We actually think that the Federal Reserve's change in policy framework, which it did in August of 2020, is exactly the right thing to be doing. For the last 15 years, the Federal Reserve-- actually probably for the last 30 years, the Federal Reserve has really been preferentially dealing with the inflation part of its dual mandate. It's supposed to look at inflation and unemployment.
And what the Fed realized this summer was that by trying to tighten every time there was the slightest sign of inflation starting to rise up, they were shutting down the employment market. And what they realized is that there's a very strong differential effect of that. When you do that, you keep pushing out the people that are most recently hired. It has an extremely disproportionate effect on women in the workforce. It has an extremely disproportionate effect on minorities in the workforce. You know, the old last hired, first fired.
So if you keep running the market hot and cold and hot and cold, you keep pushing the same people out of the market, into the market, out of the market, into the market, which really affects the ability to build wealth for minorities and the ability to earn a somewhat gender comparable wage for women. So we think what the Fed is doing now is exactly what it should be doing. And there's going to be a substantial period of repair from the COVID shock that we have, still have very high unemployment. They really need to focus on getting that unemployment rate down low. So what--
ADAM SHAPIRO: Cheryl.
CHERYL SMITH: --you're looking for-- sure, go ahead.
ADAM SHAPIRO: We're going to have Jay Powell testify tomorrow. I think he'll get asked the questions about those issues you've just raised. What do you want to hear from him?
CHERYL SMITH: I want to hear from him that the Fed, as they have said, continues to be committed to working on that unemployment mandate and that they are committed to keeping the short term rates low for an extended period of time. The latest dot plot still shows the big majority of the Fed Open Market Committee looking at 0 rates through the end-- or near 0 rates through the end of 2023. We want to hear him reiterate that.